Facebook lawsuit filed by Long Island law office

The Melville office of a national law firm filed the class action lawsuit against Facebook on Wednesday, charging the social networking site, the underwriters of its initial public offering and its board with improperly withholding information from the public that led to the stock’s decline.

The Long Island office of Robbins Geller Rudman & Dowd filed the suit in the Southern District of New York District Court on behalf of Brian Roffe Profit Sharing Plan, Jacob Salzmann, Dennis Palkon and any others who lost money in the IPO.

Robbins Geller Rudman & Dowd, based in San Diego, is the largest class action firm in the nation, winning $7.2 billion as the lead class action counsel for investors in the Enron suit and more recently recovering $200 million for Motorola shareholders regarding accounting irregularities.

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This suit focuses on the May 18 Facebook IPO involving 421 million shares issued at $38, valuing the company at $16 billion.

The suit names top Facebook executives including CEO Mark Zuckerberg as well as the firm’s board, including prominent investors such as Peter A. Thiel, and underwriters such as Morgan Stanley, J.P. Morgan Securities and Goldman, Sachs & Co. for failing to disclose damaging information regarding revenue revisions to the general public.

David Rosenfeld, a partner at Geller Rudman, said information was disclosed selectively to certain clients regarding underwriters’ decision to reduce second quarter and full-year estimates, putting other soon-to-be shareholders at a disadvantage.

“Instead, they told the underwriters, who told some clients,” Rosenfeld said. “They’re required to put that information in the prospectus, so everybody should know about it.”

Whether the case turns into a massive suit or simply a footnote for Facebook remains to be seen. But the litigation clearly puts a new face on the Facebook IPO and investors who bought shares before they slipped.

“We filed this lawsuit on behalf of three investors. We’re seeking to have the case pursued on behalf of every investor who bought shares in the IPO and lost money,” Rosenfeld said. “There will be a flurry of suits. They’ll all be consolidated into one case. The court will appoint a lead plaintiff to represent the class.”

On its first day of trading, Facebook’s stock initially rose, but later dropped below its $38 opening price. On Wednesday, it rebounded slightly, but is still down about 16 percent from its IPO.

“This not a fraud case,” Rosenfeld said, noting the firm argues there was a responsibility to disclose information about revisions by underwriters openly as the firm approached the IPO. “It’s liability.”

Although filing first doesn’t mean Robbins Geller will be named lead plaintiff, the lawsuit takes the issues of possible impropriety in the IPO from water-cooler conversation to litigation and presents legal grounds for compensation.

“It’s important that somebody filed a case. If nobody filed a case, there would be no recourse. It’s important to get the ball rolling,” Rosenfeld said. “We’ve already gotten hundreds of calls today. They’re from all over the country and the world. There’s been a positive reaction from the investment community to our lawsuit. These are the retail investors who got cheated.”

The Melville office has filed and prevailed in a wide range of suits around the world, leading to a $70 million settlement with Credit Suisse, as well as a $129 million settlement with Puerto Rico-based Doral Financial and smaller settlements with NBTY, over securities fraud.

Rosenfeld said the information about the revisions was available during the road show and was relevant to the condition of the business. Yet he says data wasn’t shared openly. “The information was known,” he said. “Clearly it was material.”

2 comments

I was suspicious of this offering from the beginning. I have come to the conclusion that instead of fighting tooth and nail trying to get a corrupt congress to enforce the laws. We should let Wall Street do anything it pleases.

After a period of Lazier faire the investors will lose any residual confidence in the system because they will continue to be screwed. Then the investors will shy away from the established investment community and we will have to invent another model for assembling capital.

You can count on the greedy SOB’s to continue with bad behavior and “they will sell us the rope to hang them with”

About the Author

Claude Solnik covers healthcare, finance, and technology/energy for Long Island Business News.